By Kelvin Wong
June 29 (Bloomberg) -- Hong Kong high school teacher Chris Poon’s dream of buying his first apartment was dashed in December when banks refused to fund more than 50 percent of the HK$3.5 million ($450,000) purchase.
Poon, 33, tried again in May and got a loan covering 70 percent of the price for the 700-square-foot (65-square-meter) apartment in Hong Kong’s Sai Wan Ho district from BOC Hong Kong (Holdings) Ltd. The mortgage rate was 2.25 percent, down from the 3.5 percent that Poon was discussing with lenders last year.
Mortgage rates in the city are the lowest in at least 19 years, as far back as records are available, to offset slower demand for other types of credit during Hong Kong’s worst recession in a decade. Among developed economies, only Japan offers similarly cheap loans, as its central bank has kept interest rates below 1 percent for the past 14 years, said Leland Sun, founder of Pan Asian Mortgage Co.
“Hong Kong banks are killing themselves with the low rates,” said Sun, whose Hong Kong-based firm advises homebuyers.
Average net interest margins for the city’s banks -- the difference between what they charge for loans and the cost to fund them -- will narrow by as much as half a percentage point this year from 2008, said Lee Yuk-kei, an analyst at Core-Pacific Yamaichi International Ltd. in Hong Kong.
Relative Margins
The aggregate margin declined to 1.62 percent in the first quarter from 1.78 percent in the previous three months, the Hong Kong Monetary Authority reported. At New York-based JPMorgan Chase & Co., the largest U.S. bank by market value, the net interest margin climbed 37 basis points to 2.76 percent in the first quarter, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
Banco Santander SA, Spain’s largest bank, said its net interest margin rose to 3.34 percent in the first quarter from 3.05 percent three months earlier.
Thinner margins will slow any recovery in Hong Kong bank profits this year, Core-Pacific’s Lee said. First-half results “are likely to be weak” because of pressure on loan profitability and weakening demand for credit, Citigroup Inc. analysts Simon Ho and Franco Lam wrote in a June 16 report.
The combined pretax profits of Hong Kong banks declined 28 percent in the first quarter from a year earlier, according to figures submitted last month by the central bank to lawmakers. By contrast, first-quarter earnings at JPMorgan and Citigroup in the U.S. and Deutsche Bank AG in Germany increased amid lower credit- market writedowns and higher trading profits.
Historic Rates
Total loans in Hong Kong fell 0.5 percent in April from March, sliding for a seventh straight month as an increase in mortgage lending failed to compensate for a drop in demand for credit among individuals and small- and medium-size companies, according to the central bank. The value of mortgage loans approved by Hong Kong banks rose for a sixth consecutive month in May to HK$28.1 billion, the highest since January 2008.
Banks cut home-loan rates in the city by 15 to 40 basis points in May to an average 2.08 percent, data compiled by Hong Kong-based mReferral Mortgage Brokerage Services show. That’s the lowest level since records began in 1990, according to mReferral.
“With these kinds of mortgage rates, banks aren’t really making much money,” said Dominic Chan, a Hong Kong-based analyst at BNP Paribas Securities Asia Ltd. “But for them it’s probably still better than putting money in, say, U.S. Treasury notes.”
The yield on 10-year Treasuries fell to 3.54 percent on June 26 in New York.
Chan has a “buy” rating on BOC Hong Kong Holdings Ltd., Bank of East Asia Ltd. and HSBC Holdings Plc, and a “hold” on Hang Seng Bank Ltd.
Mortgage Offers
The Hang Seng Finance Index, which tracks shares of the city’s biggest lenders, fell 17 percent during the past 12 months, matching the benchmark Hang Seng Index’s performance.
Bank of Communications Co., the Chinese bank 19 percent owned by London-based HSBC, started offering mortgage rates on June 10 priced at as much as 3.25 percentage points below its prime rate, which stands at 5.25 percent. The prime rate is the benchmark banks use to calculate what to charge for mortgages.
“This is probably one of the lowest mortgage offers in history,” said Patrick Chow, head of research at property agency Ricacorp Ltd. in Hong Kong, referring to the Bank of Communications rate. “We’ve seen lower offers in the past, but they only applied to specific new projects or were given only to select clients.”
Change in Focus
HSBC, Hong Kong’s biggest bank by branches, began a new mortgage plan in March offering a fixed 2.18 percent interest rate in the first year and a floating rate of 1.75 percent below the prime rate thereafter. BOC Hong Kong, which has the largest share of the mortgage market, announced a similar plan later that month, with rates as low as 2.16 percent the first year.
“This mortgage price war will go on,” Peter Wong, head of the Hong Kong unit of HSBC, said at a June 11 briefing. “Both corporate and personal lending has slowed down lately, and a lot of banks have switched their focus to the mortgage market.”
Mitsubishi UFJ Financial Group Inc., Japan’s largest bank, charges about 2.48 percent for a variable mortgage in its home market. The average 30-year fixed mortgage rate in the U.S. was 5.42 percent on June 25, up from 5.38 percent a week earlier, according to Freddie Mac, the McLean, Virginia-based mortgage buyer.
Home Sales
The decline in Hong Kong mortgage rates has spurred a recovery in the housing market, with home sales rising 42 percent by volume in May, the biggest increase since February 2008, data compiled by the government’s Land Registry show.
Prices for so-called mass-market homes, or those smaller than 1,000 square feet, increased about 10.5 percent in the two months through May 31, after falling almost 25 percent during the second half of 2008, according to Hong Kong-based Centaline Property Agency Ltd.
Falling money market rates have underpinned the mortgage price battle. The three-month Hong Kong Interbank Offered Rate fell as low as 0.33 percent on May 21, the lowest since January 2005, as the city’s central bank cut borrowing costs and spent $23 billion defending the currency’s peg to the U.S. dollar.
At 0.36 percent, the Hibor is 84 basis points lower than the equivalent London Interbank Offered Rate. The spread was 60 points on April 22, just before the Hibor began to plunge.
“Last year the banks sounded like they didn’t really want to lend me any money,” said Poon, whose mortgage plan from BOC Hong Kong was 2.75 percent below the bank’s prime rate. “This time it felt like they’ve got a price war going. Every bank I went to tried to tell me they could offer better deals than the others.”
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